Alaska Communications Systems Reports First Quarter 2008 Results

Alaska Communications Systems Group, Inc. ("ACS”) (NASDAQ:ALSK) today reported financial results for its first quarter ended March 31, 2008. Liane Pelletier, ACS president and chief executive officer, stated, "The ACS business strategy and operating model continue to focus on the Alaska wireless opportunity and increasingly, the Alaska Enterprise opportunity. Since our 2007 year-end earnings call in March, we have made significant moves in the Enterprise market. In addition to advancing the build of our undersea fiber cable, the Alaska Oregon Network (AKORN), we announced our agreement to acquire Crest Communications Corporation (Crest), owner of the Northstar undersea fiber cable. The buy and build strategy maximizes the value we can create and positions ACS as one of two suppliers of capacity between Alaska and the lower 48. When paired with ACS’ in-state data networks, the company is well positioned to capture significant share and deliver an ROI of over 20 percent on these investments for the Enterprise market.” "Further, the Crest acquisition provides us with immediate access to capacity, cash flow and synergies and positions us to reward shareholders through dividend appreciation following the close of the Crest acquisition later this year and the commercial launch of AKORN in the first quarter of 2009,” concluded Pelletier. Financial Highlights: First Quarter 2008 Compared to First Quarter 2007 Revenues were $96.8 million, a 5.6 percent increase over first quarter 2007 revenues of $91.6 million. EBITDA was $34.9 million, an increase of 4.6 percent compared to $33.4 million for the year ago period which benefited from $0.7 million in out of period CETC receipts. Wireline EBITDA performance for 2008 benefited from network access reserve changes that were $3.1 million higher than in 2007, while wireless EBITDA performance was reflective of the front loading of new wireless program costs. Operating income of $16.9 million was up 19.4 percent from $14.2 million in the prior year. Net cash provided by operating activities was $24.9 million compared to the prior year performance of $28.0 million which benefited from favorable working capital movements. The company posted net income of $5.8 million, or $0.13 per diluted share, compared to $7.3 million, or $0.17 per diluted share during the first quarter of 2007. Earnings per share in 2008 included book tax expense of $0.09 per share, with no comparable charge in 2007. David Wilson, ACS senior vice president and chief financial officer, said, "First quarter 2008 financial performance was a continuation of the trends of the past three years with robust top and bottom line growth. Wireline revenues grew 5.2 percent, driven by Enterprise sales and network access reserve changes, continuing to distance the relationship between wireline metrics and wireline financial performance. Wireless revenues grew 6.4 percent but EBITDA was pressured as we invested heavily in proactive customer retention given at&t mobility’s entry through its purchase of Dobson in Alaska, and in the very last stretch of TDMA customer conversion. With the TDMA/analog network fully turned down, ACS will save approximately $0.7 million per annum in operating costs. Competitive initiatives included advertising unlimited voice and data plans and bundles, differentiating us from at&t and targeting high value customers. Since launching these and other programs at the end of January, consumer wireless net adds have run 20 percent higher than the second half of last year; and data card activations have accounted for 12 percent of gross wireless adds.” "Our business will increasingly benefit from our Enterprise growth strategy and we now have the funds in place to finance both our AKORN build and the acquisition of Crest following the close of our $125 million convertible offering on April 8, 2008. Our funding strategy was carefully designed to minimize interest costs through a coupon of 5.75 percent, and minimize dilution risk by executing a call spread transaction setting the initial conversion strike price at $16.42,” added Wilson. "By executing the Crest transaction we have significantly reduced the cash carry costs of our long haul fiber investment strategy from $12 million to $9 million. We remain on track to cover these carry costs at commercial launch of AKORN, exiting April with an in-service book of business covering two-thirds of the target. We are also positioned to benefit from non-recurring IRU sales from Crest that have historically averaged $9 million, per annum,” concluded Wilson. Metric Highlights: First Quarter 2008 Increased retail wireless subscribers to 144,800. Total wireless subscribers decreased to 145,100 primarily due to disconnection of TDMA retail, TDMA wholesale, and analog customers. Average retail wireless monthly churn of 1.9 percent. First quarter performance was impacted by the turn down of our TDMA network and database clean up that resulted in 1,300 retail disconnects, contributing 0.3 percent to churn in the quarter. Retail wireless ARPU of $61.12, inclusive of CETC revenue of $10.76. Data ARPU contributed $3.77, up 16 percent sequentially. DSL lines increased by approximately 450 to 47,950 with retail line penetration growing to 26.3 percent. ISP ARPU was up $0.92 sequentially. Retail local access lines declined by 1.8 percent to 182,300. Recorded approximately 219,850 total local access lines. Total local access lines decreased by approximately 6,500 or 2.9 percent. 2008 Business Outlook For the full-year 2008, as previously reported, revenues are expected to be in the range of $385 million to $395 million and EBITDA is expected to be in the range of $130 million to $134 million, excluding contribution from the Crest acquisition and $6 million in start-up costs for AKORN. For 2008, ACS expects maintenance capital expenditures of $42 million and $82 million in capital expenditures related to AKORN. ACS expects net cash interest to be approximately $33 million. Conference Call The company will host a conference call and live webcast today at 5:00 p.m. Eastern Time. Parties in the United States and Canada can call 800-218-9073 to access the conference call. Parties outside the United States and Canada can access the call at 303-262-2131. The live webcast of the conference call will be accessible from the "Events Calendar" section of the company's website (www.alsk.com). The webcast will be archived for a period of 90 days. A telephonic replay of the conference call will also be available 2 hours after the call and will run until Wednesday, May 7, 2008 at midnight ET. To hear the replay, parties in the United States and Canada can call 800-405-2236 and enter pass code 11112730. Parties outside the United States and Canada can call 303-590-3000 and enter pass code 11112730. About Alaska Communications Systems Headquartered in Anchorage, ACS is Alaska’s leading provider of broadband and other wireline and wireless solutions to Enterprise and mass market customers. The ACS wireline operations include the state’s most advanced data networks and, to be launched in early 2009, the only diverse undersea fiber optic system connecting Alaska to the contiguous United States. The ACS wireless operations include the only statewide 3G CDMA network, reaching across Alaska from the North Slope to Ketchikan, with coverage extended via best-in-class CDMA carriers in the Lower 49 and Canada. By investing in the fastest-growing market segments and attracting the highest-quality customers, ACS seeks to drive top and bottom-line growth, while continually improving customer experience and cost structure through process improvement. More information can be found on the company's website at www.acsalaska.com or at its investor site at www.alsk.com. Forward-Looking EBITDA Guidance This press release includes information related to management's estimate of EBITDA for the year ending December 31, 2008. EBITDA, as defined by the company, may not be similar to EBITDA measures used by other companies and is not a measurement under generally accepted accounting principles (GAAP). Management believes that EBITDA provides useful information to investors about the company's performance because it eliminates the effects of period-to-period changes in costs associated with capital investments, interest and stock-based compensation expense that are not directly attributable to the underlying performance of the company's business operations. Management believes the most directly comparable GAAP measure would be "Net cash provided by operating activities." Due to the difficulty in forecasting and quantifying the amounts that would be required to be included in this comparable GAAP measure, the company is not providing an estimate of year-end net cash provided by operating activities at this time. Forward-Looking Statements This press release includes certain "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's beliefs and projections as well as on a number of assumptions concerning financial results, rates of return, dividend payments, and other future events made using information currently available to management. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside ACS' control. Such factors are, without limitation, the company’s ability to complete, manage, integrate, market, maintain, and attract sufficient customers to the products and services it may derive from the construction of its AKORN fiber facility and its purchase of Crest, the closing of which remains subject to certain conditions and uncertainties; changes in capital expenditures, or other factors affecting the company's ability to generate sufficient earnings and cash flows to continue to make payments on its substantial debt and dividend payments to its stockholders; the continued availability of financing to support future operations or expansion; increased competition, including from national wireless and local wireline facilities-based competitors; regulatory limitations on pricing or bundling of its communications services; the company’s ability to keep pace with rapid technological developments in the telecommunications industry; fluctuations in wireless revenue, including roaming revenue; changes in company's relationships with its roaming partners; changes in revenue from the Universal Service Fund or other public policy changes; changes in accounting policies or practices; changes in interest rates or other general national, regional or local economic conditions, including changes in tourism in Alaska. For further information regarding risks and uncertainties associated with ACS' business, please refer to the company's SEC filings, including, but not limited to, the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K and quarterly reports on Form 10-Q. Copies of the company's SEC filings may be obtained by contacting its investor relations department at (907) 564-7556 or by visiting its investor relations website at www.alsk.com. Schedule 1         ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in Thousands, Except per Share Amounts)     Three Months Ended March 31, 2008 2007   Operating revenues: Wireline $ 63,106 $ 59,968 Wireless   33,670     31,655   Total operating revenues 96,776 91,623   Operating expenses: Wireline (exclusive of depreciation and amortization) 43,270 44,143 Wireless (exclusive of depreciation and amortization) 20,121 15,875 Depreciation and amortization 16,463 17,445 Loss on disposal of assets, net   14     3   Total operating expenses 79,868 77,466   Operating income 16,908 14,157   Other income and expense: Interest expense (7,229 ) (7,447 ) Interest income 303 529 Other   (76 )   80   Total other income and expense (7,002 ) (6,838 )   Income before income tax expense 9,906 7,319   Income tax expense   (4,130 )   (7 )   Net income $ 5,776   $ 7,312     Net income per share: Basic $ 0.13   $ 0.17   Diluted $ 0.13   $ 0.17     Weighted average shares outstanding: Basic   42,939     42,384   Diluted   44,308     43,876   Schedule 2         ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. CONSOLIDATED BALANCE SHEETS (In Thousands Except Per Share Amounts)     March 31, December 31, Assets 2008 2007   Current assets: Cash and cash equivalents $ 16,344 $ 35,208 Restricted cash 2,602 2,589 Short-term investments 1,690 790 Accounts receivable-trade, net of allowance of $9,189 and $8,768 34,527 39,150 Materials and supplies 12,025 10,467 Prepayments and other current assets 5,575 5,155 Deferred taxes   17,182     21,347   Total current assets 89,945 114,706   Property, plant and equipment 1,231,424 1,209,257 Less: accumulated depreciation and amortization   (840,345 )   (825,663 ) Property, plant and equipment, net 391,079 383,594   Long-term investments 3,335 - Goodwill 38,403 38,403 Intangible Assets 21,604 21,604 Debt issuance costs 6,992 7,461 Deferred taxes 101,540 96,095 Deferred charges and other assets   2,173     1,340   Total assets $ 655,071   $ 663,203     Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current portion of long-term obligations $ 2,588 $ 780 Accounts payable, accrued and other current liabilities 57,130 64,070 Advance billings and customer deposits   9,865     10,051   Total current liabilities 69,583 74,901   Long-term obligations, net of current portion 430,099 432,216 Other deferred credits and long-term liabilities   93,152     82,075   Total liabilities   592,834     589,192   Commitments and contingencies Stockholders' equity (deficit): Common stock, $.01 par value; 145,000 authorized 433 429 Additional paid in capital 248,178 257,982 Accumulated deficit (171,537 ) (177,313 ) Accumulated other comprehensive income (loss)   (14,837 )   (7,087 ) Total stockholders' equity (deficit)   62,237     74,011     Total liabilities and stockholders' equity (deficit) $ 655,071   $ 663,203   Schedule 3             ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited, in Thousands)   Three Months Ended March 31, 2008 2007   Cash Flows from Operating Activities: Net income $ 5,776 $ 7,312 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 16,463 17,445 Loss on disposal of assets, net 14 3 Gain on sale of long-term investment - (152 ) Amortization of debt issuance costs and original issue discount 469 473 Stock-based compensation 1,581 1,822 Deferred taxes 4,130 - Other non-cash expenses 32 128 Changes in components of assets and liabilities: Accounts receivable and other current assets 4,203 4,011 Materials and supplies (1,558 ) (1,348 ) Accounts payable and other current liabilities (2,687 ) (3,591 ) Deferred charges and other assets (777 ) 95 Other deferred credits   (2,780 )   1,762     Net cash provided by operating activities 24,866 27,960   Cash Flows from Investing Activities: Investment in construction and capital expenditures (23,005 ) (10,183 ) Change in unsettled construction and capital expenditures (4,537 ) (7,142 ) Purchase of short-term investments (9,025 ) (17,225 ) Proceeds from sale of short-term investments 8,125 17,225 Purchase of long-term investments (3,625 ) - Proceeds from sale of long-term investments - 162 Placement of funds in restricted account (13 ) (1,982 ) Release of funds from escrow account   -     1,601     Net cash used by investing activities (32,080 ) (17,544 )   Cash Flows from Financing Activities: Payments of long-term debt (367 ) (418 ) Payment of cash dividend on common stock (9,220 ) (9,099 ) Payment of withholding taxes on stock-based compensation (2,143 ) (2,303 ) Proceeds from issuance of common stock   80     230     Net cash used by financing activities (11,650 ) (11,590 )   Change in cash and cash equivalents (18,864 ) (1,174 )   Cash and cash equivalents, beginning of period   35,208     36,860     Cash and cash equivalents, end of period $ 16,344   $ 35,686     Supplemental Cash Flow Data: Interest paid $ 7,031 $ 7,268 Income taxes paid $ - $ 134   Supplemental Noncash Transactions: Property acquired under capital leases $ 58 $ 51 Dividend declared, but not paid $ 9,318 $ 9,189 Schedule 4     ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. SCHEDULE OF WIRELINE REVENUES (Unaudited, in Thousands)       Three Months Ended March 31, 2008 2007   Retail $ 23,646 $ 24,956 Wholesale 5,335 5,995 Access 26,304 23,904 Enterprise   7,821   5,113 $ 63,106 $ 59,968 Schedule 5         ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. SCHEDULE OF EBITDA CALCULATION (Unaudited, in Thousands)   Three Months Ended March 31, 2008 2007     Net cash provided by operating activities $ 24,866 $ 27,960 Adjustments to reconcile net income to net cash (provided) used by operating activities: Depreciation and amortization (16,463 ) (17,445 ) Loss on disposal of assets, net (14 ) (3 ) Gain on sale of long-term investment - 152 Amortization of debt issuance costs and original issue discount (469 ) (473 ) Stock-based compensation (1,581 ) (1,822 ) Deferred taxes (4,130 ) - Other non-cash expenses (32 ) (128 ) Changes in components of assets and liabilities: Accounts receivable and other current assets (4,203 ) (4,011 ) Materials and supplies 1,558 1,348 Accounts payable and other current liabilities 2,687 3,591 Deferred charges and other assets 777 (95 ) Other deferred credits   2,780     (1,762 ) Net income $ 5,776 $ 7,312 Add (subtract): Interest expense 7,229 7,447 Interest income (303 ) (529 ) Depreciation and amortization 16,463 17,445 Loss on disposal of assets, net 14 3 Gain on sale of long-term investments - (152 ) Income tax expense 4,130 7 Stock-based compensation   1,581     1,822   EBITDA $ 34,890   $ 33,355         Note: In an effort to provide investors with additional information regarding the Company's results as determined by generally accepted accounting principles (GAAP), the Company also discloses certain non-GAAP information which management utilizes to assess performance and believes provides useful information to investors. The Company has disclosed its net income before interest, provisions for taxes, depreciation expense, gain or loss on asset purchases or disposals, amortization of intangibles and stock based compensation expense (EBITDA) because the Company believes it is an important indicator as it provides information about our ability to service debt, pay dividends and fund capital expenditures. EBITDA is not a GAAP measure and should not be considered a substitute for net cash provided by operating activities and other measures of financial performance recorded in accordance with GAAP. Schedule 6               ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. ALLOCATION OF STOCK BASED COMPENSATION (Unaudited, in Thousands)       Three Months Ended Three Months Ended March 31, 2008 March 31, 2007 As reported on Schedule 1 Stock-Based Compensation Adjusted As reported on Schedule 1 Stock-Based Compensation Adjusted   Operating expenses: Wireline (exclusive of depreciation and amortization) $ 43,270 $ (1,404 ) $ 41,866 $ 44,143 $ (1,631 ) $ 42,512 Wireless (exclusive of depreciation and amortization) 20,121 (177 ) 19,944 15,875 (191 ) 15,684 Depreciation and amortization 16,463 - 16,463 17,445 - 17,445 Loss on disposal of assets, net   14   -     14   3   -     3 Total operating expenses $ 79,868 $ (1,581 ) $ 78,287   77,466   (1,822 )   75,644           Note: The balances reported on Schedule 1 - Consolidated Statements of Operations, include the company's adoption of SFAS 123(R) Share-Based Payment. This schedule shows the company's operating performance prior to that expense being recorded to allow analysis of the operating segments without these non-cash charges. Schedule 7     ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. INVESTMENT IN CONSTRUCTION AND CAPITAL (Unaudited, in Thousands)   Three Months Ended Three Months Ended March 31, March 31, 2008 2007     Investment in construction and capital $ 23,005 $ 10,183   Capitalized interest   (295 )   (218 )   Investment in construction and capital, net of capitalized interest $ 22,710   $ 9,965         Growth 15,053 1,860   Maintenance and other   7,657     8,105     Investment in construction and capital, net of capitalized interest $ 22,710   $ 9,965   Schedule 8           ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. KEY OPERATING STATISTICS (Unaudited)     March 31, December 31, March 31, 2008 2007 2007 Wireline:   Retail Local 182,318 185,658 193,851 Quarterly growth rate in retail local telephone access lines -1.8 % -1.5 % -0.5 % Average monthly revenue per subscriber for the quarter $ 19.75 $ 19.69 $ 19.66     Long Distance Long distance subscribers 65,089 65,256 65,043 Average monthly retail revenue per subscriber for the quarter $ 19.60 $ 21.08 $ 21.26   Internet DSL subscribers 47,948 47,501 45,448 Dial-up subscribers   8,378     9,125     11,728     56,326     56,626     57,176     Average monthly DSL & dial-up revenue per subscriber for the quarter $ 30.36 $ 29.44 $ 29.01     Wholesale Resale access lines 10,641 10,774 10,573 UNE lines   26,890     29,922     41,453     37,531     40,696     52,026     Quarterly growth rate in wholesale local access lines -7.8 % -5.5 % -10.1 % Average monthly revenue per subscriber for the quarter $ 26.96 $ 26.74 $ 22.98       Wireless:   Retail wireless subscribers 144,755 144,451 134,699 Average monthly churn for the quarter 1.9 % 1.5 % 1.4 % Average monthly revenue per subscriber for the quarter (a) $ 61.12 $ 64.20 $ 61.21   Resale wireless subscribers 358 1,999 2,812   Total wireless subscribers 145,113 146,450 137,511 Average monthly churn for the quarter 2.3 % 1.5 % 1.4 % Average monthly revenue per subscriber for the quarter (a) $ 61.12 $ 63.84 $ 60.60       (a) CETC added $10.76 and $10.77 to retail and total wireless ARPU in the first quarter of 2008, respectively. It also added $11.63 and $11.64 to retail and total wireless ARPU in the fourth quarter of 2007, and added $10.26 to both retail and total wireless ARPU in the first quarter of 2007. Schedule 9                 ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. SCHEDULE OF HISTORICAL WIRELINE REVENUES (Unaudited, in Thousands)         2007 2006 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1   Retail $ 23,957 $ 24,835 $ 24,117 $ 24,956 $ 23,622 $ 24,679 $ 24,632 $ 22,634 Wholesale 5,636 5,994 6,010 5,995 7,123 6,269 6,068 5,947 Access 26,562 25,578 24,850 23,904 23,693 23,132 23,006 24,658 Enterprise   7,873   6,988   5,897   5,113   4,811   4,614   4,458   4,005 $ 64,028 $ 63,395 $ 60,874 $ 59,968 $ 59,249 $ 58,694 $ 58,164 $ 57,244